New Perspective on FX Markets: Order‐Flow Analysis

Abstract

Though fundamental and technical analysis are still widely used in foreign exchange markets, a new type of analysis has emerged: order‐flow analysis. Order‐flow analysis uses the flow of buy and sell orders to both explain exchange rates contemporaneously and forecast future movements. This article contrasts order‐flow analysis with the traditional approaches and reviews lessons learned. Most important among those lessons is order flow’s ability to account for the lion’s share of movements in the major floating rates. On the policy front, widespread availability of electronic order‐flow data brings many policy questions within reach for the first time. After reviewing these policy questions, the article closes with a discussion of how FX market institutions are evolving and how this evolution will affect application of order‐flow analysis in the future.

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